ABSTRACT
A core assumption of market efficiency is that securities prices incorporate all price-sensitive information that is contained in historical prices. The usually tacit corollary is that price movements do not provide any guide to future prices, and hence markets have no predictive ability. However, an implicit challenge to this assumption is formal recognition that markets do have ‘momentum’ (Carhart, 1997): that is, price moves in one direction tend to continue. This is generally attributed to behavioural factors; namely, irrational biases in investor decisions ranging from herding and myopic trend-following to under – or overappreciation of the significance of new information. There is also, however, an argument that auto-correlation of security prices can occur with totally rational investors because prices of securities in markets with predictive ability will move towards a forecast price. Testing this argument is my research objective. This chapter extends a decades old question (Cowles, 1933), and tests evidence and intuition that securities markets can predict future prices over the medium term.
